YOU CAN’T TAKE IT WITH YOU
ment; and it will work that way. However, that doesn’t mean that you want to actually own the policy. If you have a large estate and own your own life insurance policy, you will only be making your estate larger when you die. This is why, although the government has decreed that life insurance policy benefits may pass to the beneficiaries tax free, the death benefit will be included as part of the estate of the policy owner.
For example, Alice and Tom Client have a joint net worth of $8 million. They have split up their estate into two bypass trusts, so each estate is worth $4 million. However, they are both pretty sure that they won’t live long enough to see the repeal of the estate tax in 2010. Therefore, their beneficiaries will have to pay some estate taxes when either one (or both) of them dies. Tom takes out a life insurance policy on himself for $750,000. While he’s not sure how much his estate taxes will be, he feels comfortable that the death benefit from the insurance policy will cover most, if not all, of the taxes due. Alice also takes out a $750,000 policy on herself. Both Alice and Tom own their own policies. If Tom were to die today, only $1 million of his estate would pass to his heirs tax free. The remaining $3 million will be taxed.1 Plus, since he is the owner of his insurance policy, his estate has now increased by $750,000 overnight, making his total gross estate worth $3,750,000! If Alice were also to die right now, her estate would be the same. Their beneficiaries would have to pay estate taxes on her $3.75 million. They would have the two death benefits of $750,000 each, but would have to come up with the remaining tax money on their own or directly from the estates.
Tom’s estate Tom’s death benefit If Tom were to die today (2002): Tom’s exclusion allowance Tom’s taxable estate
$3 million death benefit
1This example is a very simple calculation (assuming no costs and the maximum allowed tax credit) only designed to show the effects of owning your own life insurance policy. It’s not designed to be an actual example of what a couple would pay in estate taxes.